Last week I wrote about societal aversion toward living on a budget and the integral role a budget plays in wealth accumulation, regardless of how much money you make. But it occurred to me that I should follow up with a post that provides some guidance on how to create a manageable budget that reflects your lifestyle.
Many people attempt to create a budget, and as soon as they pull out a year’s worth of bank statements and credit card bills, they are overwhelmed with despair, consumed with defeat, and convinced their financial life is too complicated to fall within a traditional budget. But guess what? Regardless of what your mom told you as a child, you’re not that special. Everyone has the capacity to create a meaningful budget that guides financial decisions throughout the year. To that end, here are four things to focus on when creating one:
Identify Fixed Expenses
Fixed expenses will generally comprise a majority of your budget, so they should create significant traction in the budgeting process. This category includes home mortgage, car note, student loans, cable/internet bill, subscriptions, etc. These items should be relatively easy to spot after simply comparing your current month to prior month bank and credit card statements.
Estimate Trends for Variable Expenses
Other bills, even if they recur monthly, may vary each billing cycle. For example, most utilities fluctuate depending on the time of year, but look back to a few different months throughout the year, and come up with an average. As for other expenses that vary year-to-year, such as medical bills, think about the last two years. If you rarely have any medical expenses, then don’t budget for any. However, the caveat for eliminating this type of expense from your budget is the assumption that you have a healthy savings reserve for unexpected expenses.
Use Account Aggregation Software
If you are using an Excel file to track your monthly expenses, unless you’re one of those people who enjoy creating spreadsheets, you will never update it or know if you are staying on track. It is much easier to use an app such as Mint or Expensify that aggregates your bank and credit card accounts, categorizes expenses, and alerts you when you are over budget. There are inherent security risks in providing personal financial information to these sites, but prudent users should be able to enjoy their benefits. As an alternative, some budget apps, such as YouNeedABudget.com, do not require account info. Instead, they allow you to upload statements into a Dropbox file.
Don’t Create a “Perfect” Budget
Perfection is the enemy of completion. A budget is meant to be a guide, not an oracle for predicting a year’s worth of expenses. So don’t approach it with the expectation of absolute precision, and don’t tackle so much detail that each expense becomes its own category. Start with just ten categories and let that guide you for a year. Then the following year, you will have twelve months of history to help you increase accuracy, so each year the process gets easier and more accurate.
Living on a budget isn’t an end to eating out or enjoying your hard earned money. It’s a plan to make sure you are spending money on things that actually make you happy and improve your quality of living. So focus on these four ideas, and create a budget that reflects your lifestyle and keeps you on track with your financial goals.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.